What it is:
How it works/Example:
For example, a 26-week T-bill is priced at $9,800 on issuance to pay $10,000 in six months. No interest payments are made. The investment return comes from the difference between the discounted value originally paid and the amount received back at maturity, or $200 ($10,000 - $9,800). In this case, the T-bill pays a 2.04% interest rate ($200 / $9,800 = 2.04%) for the six-month period.
Why it matters:
T-bills are considered the safest possible risk-free rate of return," based on the credit worthiness of the United States of America. This risk-free rate of return is used as somewhat of a benchmark for rates on municipal bonds, corporate bonds and bank interest.and provide what is referred to as a "
In addition, because T-bills are very short-term notes and Treasury bonds) there is very little interest rate risk. When interest rates rise, the price of fixed-income securities falls as the relative value of their future income stream is discounted. However, short-term securities are much less affected than long-term securities because higher rates have a very limited effect on future income streams.(as opposed to Treasury
Treasury interest is also exempt from state and local taxes because of the law of reciprocal immunity, which stipulates that states cannot tax federal securities and vice versa.